How to manage a large mutual fund portfolio

Sarvesh Vardhan has been investing in mutual funds for the past seven years. He keeps adding good funds regularly, but has not exited any yet. Vardhan now feels that he needs to prune the number of funds since he is unable to keep track of all of them. He thinks that he should eliminate all poor performers, but many funds that did well in the past have not fared well recently. He wants to know the parameters on the basis of which he should eliminate the schemes from his portfolio.

Sarvesh Vardhan needs to begin by aligning his mutual fund holdings with the role they will play in helping him meet his financial goals. He should review the funds for their contribution to his requirements and eliminate those that are no longer relevant.

The next parameter should be the comparison of his funds with those of similar type. He should ensure that the peer group he is considering has a similar portfolio objective and fund management style. He should think of exiting the funds that have been performing poorly consistently. A fund that has been an above-average performer in the past should be given time to rectify wrong investment decisions. Keeping a close watch on the fund over 3-4 quarters will show if the fund is making changes as also the impact of those changes. If the fund continues to underperform even after this period, Vardhan should consider exiting.

Some funds, such as gilt and sectoral funds, may have been included in anticipation of benefiting from a particular situation. If the expected situation did not materialise, then these funds are likely to have performed badly and, hence, must be exited. Another type of fund that Vardhan should eliminate from his portfolio is the one that shows inconsistency in its objectives. He will find that such funds show volatility and their returns are at variance with their declared benchmarks. A large-cap fund taking a high mid-cap exposure is an example. Such funds are risky because they may have an allocation to assets that is not appropriate for him.

Once Vardhan follows the above-mentioned process, he will have a portfolio of well-managed funds geared to his investment expectations. He should be disciplined in reviewing his investments and exit when required.

The content on this page is courtesy Centre for Investment Education and Learning (CIEL).